County-Level Patterns of Undeclared Work: An Empirical Analysis of a Highly Diversified Region in the European Union

The scale and impact of undeclared work on the economy and on society are more apparent in emerging countries compared to developed economies. The same issue concerns regions and local communities, which have to deal with the positive and negative consequences of undeclared work and the shadow economy. We took advantage of a survey conducted among residents of a Polish Central NUTS 1 Region—which is one of the most diversified regions in the European Union—and combined this unique dataset with meso-data to estimate the scale and drivers of engagement in undeclared work. We use the framework of a hierarchical logit model with random effects for small administrative units (counties). The paper aims to understand the mechanism and key drivers of undeclared work in one NUTS 1 region in a CEE country. We found that county-specific random effects play an important role in explaining engagement in undeclared work, which is related to differences in the perception of social norms among counties. We argue that the “efficiency” of local governments in fulfilling local needs influences, to a large extent, social norms in local communities, which in turn determines individuals’ involvement in informal labour. Moreover, we show the asymmetry between formal and informal institutions, which is strongly embedded in the cultural and historical background, is an important driver of informal employment.